What Could The Hindenburg Report Mean For India’s Infrastructure Behemoth Adani Group?


Adani Group has frequently come under scrutiny over the group’s high debt load, which stood at nearly Rs 2.2 lakh crore at the end of FY22.

Given Hindenburg has short positions on the stocks before it came out with a report, it has incentives only to highlight the negatives.

If all investors in India were to only rely on past allegations, a significant chunk of publicly listed companies in India would not be investable. Yet, it would serve the Adani group well to clarify these issues raised by Hindenburg and help investors understand the conglomerate better.

Over the last few years, stocks of the Adani Group have been some of the best wealth creators in the market. Over the last five years, the flagship group, Adani Enterprises alone, has seen its stock price go up seventeen fold.

The incredible performance of the stocks has created interest among retail shareholders while helping these stocks enter market indices as well. However, the success has brought increased scrutiny from investors, media, politicians, credit rating agencies, and regulatory authorities.

One of the reasons for the scrutiny was the group’s high debt load, which stood at nearly Rs 2.2 lakh crore at the end of FY22. Nevertheless, the group clarified that a significant portion of the debt came from foreign lenders based on its strong credit rating.

CreditSights, a credit research company, came out with a report that called the group deeply overleveraged. But, a while later, the research organisation toned down its criticism of the group’s leverage after a meeting with the company.

Just as the furore around its debt was dying down, a short-selling firm named Hindenburg Research came out with a research report titled “Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History”.

The title of the report itself suggests the strong criticism it contains about the group. And investor reaction to the report has been quite strong – nearly $ 12 billion have been collectively wiped off Adani stocks.

What Does the Hindenburg Report Allege?

The report alleges that the group is or has been associated with activities such as stock manipulation, money laundering, theft of taxpayer funds, generating artificial revenues, and siphoning off money from listed entities and that members of the Adani family are involved in these activities.

One of the biggest questions surrounding the Adani Group has been the rapid rise in stock price without any significant participation by retail or institutional shareholders. The stocks have risen to relatively higher valuation levels than listed peers in domestic and global markets.

According to Hindenburg, the stock valuations of the group are nearly 85% higher than the fair value of the stock, measured by relative multiples. The report alleges that the promoters hold a significantly higher stake than the SEBI stipulated 75 per cent through various entities. After promoters, a significant portion of the shareholding is owned by “funds” that have invested their entire asset base into a single stock, which is unlikely to happen in funds.

Is The Adani Group Associated with Ketan Parekh and Amicorp?

The report alleges that SEBI had previously investigated the Adani Group for connections with stock manipulator Ketan Parekh. It says that Parekh’s daughter had worked with Elara Capital, which runs one of the funds that has all of its assets in Adani stocks.

Hindenburg says that it has spoken to traders who had worked with Elara in the past and have directly admitted that the Adanis have a much higher stake in their company than is officially disclosed.

The report alleges that SEBI had previously pulled up the Adani group for colluding with Ketan Parekh to push up stock prices. The report has attempted to establish a continuing relationship between Parekh and the Adani group by citing that Parekh’s London firm Orbit Investment Securities is run by Jayechund Jingree, a former director of Adani Global Limited, a Mauritius-based company.

Similarly, the report has alleged connections between the Adani Group and Amicorp, which it says is an organisation that aids in laundering money.

According to Hindenburg, Amicorp was one of the key players in the 1MDB scandal where $4.5 billion worth of taxpayer money was siphoned off. Further, it alleges the group’s contact with fugitives, and the involvement of group patriarch Gautam Adani’s brothers in activities that the government investigated. The report also suggests that shell companies launched by members of the Adani family were used to siphon off money from the Indian entities without proper disclosures.

What Could These Allegations Mean for The Adani Group?

Clearly, these allegations are quite serious and could have a potentially adverse impact on the Adani Group.

The Adani Group’s forays into several new capital-intensive sectors like data centres, cement, and others have meant that it requires more capital. Hence, the group has been looking to tap the markets for more money through a follow-on public offer (FPO).

Hindenburg coming out with a report right before Adani’s FPO could be a purposeful attempt to derail the company’s finances and deter investors from pumping money into the company.

With a negative public perception, Adani Group might find it difficult to raise financing, increasing risks of default in the already leveraged group.

Why Did A Foreign Entity Raise This Issue?

Some have objected to a foreign entity raising these questions to tarnish an Indian conglomerate’s reputation. Not many sell-side analysts or media persons have openly questioned large conglomerates in India – for a very good reason.

In the past, there have been cases where Indian stock analysts have been arrested for writing “defamatory” reports, allegedly at the behest of the companies they wrote reports against. As a result, many investors and analysts usually criticise companies in private but rarely in public. Further, short-selling is banned in India, which could make the market inefficient as short-sellers help balance the market by criticising companies when necessary.

In the past, only a Canada-based brokerage had written reports against Indian conglomerates but had to shut down its Indian operation after arrest warrants were issued against the analysts.

Suspicion Over Hindenburg’s Timing

At the same time, it should be remembered that Hindenburg has short positions on the stocks before it comes out with a report, incentivising it to highlight only the negatives. Usually, all short sellers focus on constant attacks on the management, pose difficult questions during conference calls, attack the business models, and highlight past mistakes to precipitate a fall in the stock prices.

The short-sellers often rely on shock-and-awe techniques to gain attention.

Hindenburg itself has been a subject of investigation due to its practice of going short on the stocks before coming out with research reports. In addition, a significant part of the report focuses on past investigations and activities.

In a country like India, where bureaucracy and politicians wield significant extra-legal power, several large conglomerates have been under investigation. Sometimes these charges were genuine, while sometimes, they are simply made up only to create trouble.

If all investors in India were to only rely on past allegations, a significant chunk of publicly listed companies in India would not be investable. Yet, it would serve the Adani group well to clarify these issues and help investors understand the conglomerate better.

Also Read: Explained: Why Has The Adani Group’s Debt-Fueled Growth Raised Eyebrows